Insurance Design and Pharmaceutical Innovation

Leila Agha, Soomi Kim and Danielle Li

No 27563, NBER Working Papers from National Bureau of Economic Research, Inc

Abstract: This paper studies how insurance coverage policies impact pharmaceutical innovation. In the United States, most patients obtain prescription drugs through insurance plans administered by Pharmacy Benefit Managers (PBMs). Beginning in 2012, PBMs began excluding coverage for many newly approved drugs when cheaper alternatives were available. Relative to firms’ existing practices, we show that exclusions substantially reduced insurance claims for targeted drugs, lowering their profitability. This new risk of coverage exclusion reshaped upstream pharmaceutical R&D: for every 1 standard deviation increase in drug class exclusion risk, we estimate an 11% decline in subsequent development activity. This change translated into a relative decline in the development of drug candidates that appear more incremental: that is, those in drug classes with more pre-existing therapies and with less scientifically novel research.

JEL-codes: I11 O31 O32 O33 O38 (search for similar items in EconPapers)
Date: 2020-07
New Economics Papers: this item is included in nep-hea and nep-ias
Note: AG CF EH IO LE LS PE PR
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Citations: View citations in EconPapers (5)

Published as Leila Agha & Soomi Kim & Danielle Li, 2022. "Insurance Design and Pharmaceutical Innovation," American Economic Review: Insights, vol 4(2), pages 191-208.

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